Environment Month Takeaway: It’s Time to Bust Some Business Models

Editor’s note: Throughout 2017, NextBillion is organizing content around a monthly theme, dedicating special attention to a specific sector alongside our broader coverage. This post is part of our focus on the environment for the month of March.

Beijing’s only remaining coal-fired power plant officially powered down earlier this month. The Huaneng Beijing Thermal Power Plant was the last of four plants churning out dirty energy in or near the megacity. After years of news stories and constant photos of city dwellers hidden behind surgical masks as they made their way through streets thick with smoke – not to mention the massive public health problems that accompany those images – Chinese officials apparently had had enough.

As The Sydney Morning Heraldreports: “Beijing has committed to reducing coal use by 11.8 million tonnes by the end of 2017, compared to 2012 levels. It will reach 70 percent of the target after the latest closure.”

Halfway around the world, a similar fate awaits the Navajo Generating Station. Located on the Navajo Indian Reservation near Page, Arizona, more than 800 people work at the coal power plant and the mine that feeds it, which now face de-commissioning in 2019. Market forces are to blame, with a glut of cheap natural gas, not to mention price competitiveness from wind and solar.

For the people reliant upon coal for a living, there’s no way to sugar coat what’s happening. With the exception of a few places, the globe has hit peak coal. The industry that people depended on for more than a century is leaving, and cleaner technology is replacing it. It’s no longer a matter of if, but when. Day by day, the old arguments against clean energy are crumbling. The red herring argument that lower emissions equal lower economic growth has been soundly disproven – three years running.

No one wants to be the very last horse and buggy cart buyer. (Except, maybe, the horse trainer and the buggy manufacturer – or the politicians hoping to capitalize on false hope that the buggy industry’s best days are still to come). But simply refining the horse and buggy approach and hoping to solve the modern problems of global climate change and affordable clean energy isn’t the solution either. In a powerful post on NextBillion, Stuart Hart wrote that “corporate sustainability” efforts too often mean simply tinkering around the edges of busted business models instead of transformative industry approaches.

“Rather than chasing the fantasy of rating entire corporations as to their ‘sustainability,’ let us instead shift the ‘unit of analysis’ and spend more time understanding (and driving) the Green Leap – new strategic initiatives within corporations focused on leapfrog, clean technology and disruptive new business models that serve and lift the poor,” wrote Hart.

This isn’t an argument for businesses behaving morally out of concern for the environment: Companies that do not price in the shift to sustainability are going to be left behind, just like the coal industry. The price of photovoltaics has dropped by 85 percent in just seven years, making solar a more economical play compared with coal, Carbon Tracker founder Mark Campanale told NextBillion in an interview. For fossil fuel companies and investors that think not in terms of years, but decades, the pace of these changes must spark a dramatic reassessment of their time horizons.

“If a company, for example, spends $10 billion on building a new pipeline from Canada to the U.S. because they think it’s got a 50-year life, what happens if it only turns out to have a 10-year life?” Campanale said. “The economics, the return on capital, are going to be all wrong. So those are the risks we’re trying to highlight, to get the math around unburnable carbon into the metrics used by your typical Wall Street energy analysts.”

Hart and Campanale offered brutal honesty to corporations that need to get in the game – and quickly. But even within industries that we consider green, such as the off-grid energy sector in emerging markets, we can’t rely upon happy talk to propel things forward. Business models and investment strategies need a full hearing, and basic premises need to be challenged. An example of perhaps inconvenient honesty came from the principals at Ceniarth, an impact investor focused on the off-grid energy access sector since 2014. Managers at the company wrote about their plans to shift away from the home solar market, partly out of fear the sector is overheating, and partly because of doubts about its social impact.

“As we maintain current financial exposure to the solar home system sector, it would be economically rational for us to keep our heads down quietly. As a mission-oriented firm, however, we felt it was important to transparently share our insights even if they are in conflict with our financial interests.” NextBillion is planning to publish additional posts that offer rebuttals of Ceniarth’s conclusions on the state of play in the off-grid solar market. But there’s a clear implication to their reassessment: Even the worthiest goals don’t always translate easily to strong business models or social impact.

The urgency of environmental degradation also calls for organizations to stretch beyond their traditional comfort zones. In 2015, the charity Water.org launched its first fund focused on base of the pyramid water and sanitation needs, which invested in seven microfinance institutions (MFIs). It later created a separate entity, WaterEquity, to oversee the fund. Now WaterEquity is set to launch a $50 million fund targeting enterprises in India, Indonesia, Cambodia and the Philippines to invest in water purification, sanitation and other businesses alongside MFI investment. The goal is to reach 4.6 million people without proper access to water or sanitation.

“What if we could demonstrate to forward-thinking philanthropists and investors, along with mainstream financiers, that there is a market demand – a pipeline of investable and bankable deals in the water sector?” Alix Lebec and Hannah Kovich of WaterEquity wrote.

The business, technological, financial and political (notwithstanding the U.S. government) tailwinds have never been moving in such alignment toward a cleaner and more sustainable world economy. It will take truth tellers and, yes, some persistent agitators to make sure this ship stays on course.